Page 6 - Penalties: Reconsidering the Reasonable Cause Defense to Late-Filing Penalties and the Impact of the Service's Clarification of the DIIRSP

PeNALtieS

agent asked for all international information returns past few years, taxpayers and practitioners have started to
through 2004, including Form 3520-A. The taxpayer challenge Boyle in the e-filing context. The basic question
submitted all the international information returns and is whether courts should reconsider the bright-line rule in
signed a closing agreement for the 1999 through 2002 tax Boyle when a taxpayer provides her tax information to her
years, which required substantial penalties for civil fraud preparer and the preparer purports to e-file the return, but for
and failure to file foreign bank account reports, but no some reason, the Service rejects the return and the taxpayer
separate international information return penalties. arguably has little reason to suspect that the return was not
After the taxpayer signed the closing agreement and actually filed. For example, the preparer may fail to receive
paid the penalties, the Service imposed a relatively large a rejection notice from the Service or the preparer may fail
additional penalty for late-filing Form 3520-A for 2003, to tell the taxpayer of the rejection. In Haynes, the Fifth
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reasoning that the closing agreement covered only the Circuit has been asked to decide whether the bright-line rule
years 1999 through 2002. The taxpayer paid the penalty in Boyle should be revisited in the e-filing context. The Haynes
and sued for a refund. Citing Boyle, the court stated that decision may have far-reaching implications for taxpayers
reasonable cause requires a taxpayer to demonstrate that citing reliance on a tax advisor as a ground for reasonable
he exercised ordinary business care and prudence but cause to avoid a late-filing penalty.
nevertheless was unable to file within the prescribed time.
The court then explained the reasons the taxpayer could C. Misunderstanding #3: Additional
have reasonable cause, including that he first relied on Conditions Must Be Met and an
Bly’s advice that no returns need be filed, then relied on
Carney’s further erroneous advice that he did not need to Affirmative Showing of Reasonable
file Form 3520-A. In other words, despite the taxpayer’s Cause in a Sworn Statement is Required
involvement in a scheme that used offshore trusts and to establish Reasonable Cause
companies with the specific purpose of reducing his taxes,
he could reasonably rely on the advice of others to show In addition to establishing reasonable cause under the
reasonable cause. appropriate legal standard, taxpayers must address other
Applying the foregoing principles, the subtle differences factors before the Service will grant a request to abate a
between applying the reasonable cause defense to late- late-filing penalty, including the taxpayer’s compliance
filing and accuracy-related penalties become apparent. history and the length of time it took the taxpayer to com-
Where a taxpayer relies on an agent to fulfill a known filing ply. Additionally, Treasury Regulations generally require
requirement, that reliance generally does not relieve the a taxpayer to memorialize a penalty abatement request
taxpayer’s responsibility to ensure timely filing. However, in writing, even though the I.R.M. relaxes that rule for
James, Nance, and the other cases cited illustrate that a certain penalty abatement requests. It is generally advis-
taxpayer can claim complete reliance on a professional’s able for the taxpayer to defer requesting an abatement of
advice as to the existence or timing of a filing requirement a late-filing penalty until all conditions are satisfied and
to establish reasonable cause. In order for reliance on a tax the facts and circumstances constituting reasonable cause
advisor to rise to the level of ordinary business care and are alleged in a sworn statement.
prudence, and therefore avoid a late-filing penalty, the
taxpayer must prove that the tax advisor was competent, a. Compliance History and Proof of Current
that the taxpayer provided the advisor with all necessary Compliance
information, and that the taxpayer reasonably expected In determining whether a taxpayer exercised ordinary
the advisor to prepare proper tax returns. business care and prudence, the Service employee should
consider any reason advanced by the taxpayer and other
2. Reliance on a Tax Professional to File a factors not relied upon by the taxpayer. Specifically, a
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Return (Electronically or Otherwise) Service employee should check at least the preceding three
A related issue is the extent to which a taxpayer may rely tax years to examine the taxpayer’s compliance history.
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upon a tax professional to electronically file a tax return. In The same penalty, previously assessed or abated, tends
Boyle, the Supreme Court held that the requirement to file a to support that the taxpayer did not exercise ordinary
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tax return is a personal, nondelegable duty. This foundational business care for the later tax period at issue. And, even
principle has been construed to mean that reliance on a tax if the penalty in question is the taxpayer’s first incident
advisor to file a tax return cannot in and of itself constitute of noncompliant behavior, reasonable cause should not
reasonable cause to avoid a late-filing penalty. Over the be assumed to exist because a first-time failure to comply

28 JoUrnal of taX praCtiCe & proCedUre Winter 2020